These Little Planes Are Going the Way of the Dodo Bird

If you go to just about any commercial airport in the U.S. today, you'll see plenty of jets that seat 37-50 passengers. Small regional jets exploded in popularity in the late 1990s and early 2000s. Airlines first used them to replace turboprops as "hub feeders" and later used them to serve new routes that did not have enough traffic for mainline service but were too long for turboprop flights. (Eventually airlines also used them to add frequencies between larger markets.)

However, the airline industry has changed dramatically in the last 10 years. Jet fuel prices have skyrocketed from less than $1 per gallon to around $3 per gallon. Business travelers have grown tired of the cramped conditions (and lack of first class seats) on 50-seat jets. Recently, pilot shortages have become yet another headache for 50-seat-jet operators.

50-seat jets once ruled the skies.

As a result of all these headwinds, Delta Air Lines (NYSE: DAL) is moving aggressively to slash its 50-seat-jet fleet. United Continental (NYSE: UAL) and American Airlines (NASDAQ: AAL) have been slower to phase out these planes, but pilot shortages at regional airlines like Republic Airways (NASDAQ: RJET) are starting to force their hands. In fact, small regional jets could be nearly extinct in just five years!

Too expensive to flySeveral factors are conspiring to make small regional jets obsolete. The rise in fuel prices noted above is the most obvious one. Jets tend to burn more fuel than similar-size turboprops, and smaller aircraft tend to burn more fuel per seat than larger aircraft. As the smallest class of jets in commercial service, regional jets with 37-50 seats are the biggest fuel-guzzlers out there!

When United announced plans to replace some of its 50-seat jets with 76-seat Embraer E-175s, it stated that the E-175 burns 10% less fuel per seat. This may not seem like a lot, but the E-175 has a high proportion of premium seats: 12 seats in United First and 16 in Economy Plus, compared to all-economy seating on 50-seat jets. This means that United can earn higher unit revenue with these planes at the same time as it reduces its unit cost.

United is gradually replacing its 50-seat jets with more profitable 76-seat models.

Maintenance costs are another killer for small regional jets. This is accentuated by the fact that many 50-seat jets are now around 12-15 years old, a time when major engine overhauls are often necessary. For planes that are barely profitable to fly in the first place, investing hundreds of thousands of dollars to keep them going is a bitter pill to swallow.

That's one of the biggest reasons why Delta is radically downsizing its fleet of 50-seat jets. The company more or less stopped doing engine overhauls on small regional jets last year. When the engines need major work, the aircraft are being retired. Delta is replacing them with 76-seat jets (which have a roughly 10% unit cost advantage according to United's analysis) as well as small mainline planes that have even lower unit costs.

The growing pilot shortage may be the last straw for small regional jets. In the past, one of the big "equalizers" for these planes was extremely low labor costs. First year co-pilots at regional airlines have an average base salary of just $22,400, according to The Wall Street Journal. Even after five years, the average base salary is only $35,100. However, this situation is unsustainable.

Tougher rules for pilot training have caused the supply of new pilots willing to work for meager regional airline wages to dry up. Meanwhile, major airlines are raiding the regional airline pilot ranks to replace retiring pilots and to comply with new crew-rest regulations. Regional airlines cannot raise salaries to a level that would attract new pilots and still fly for a price that would make sense for their legacy carrier partners.

A quick exitDelta recognized the declining viability of 50-seat jets before its peers. The company had an astounding 474 50-seat regional jets in service in 2009, but plans to shrink that fleet to no more than 125 planes by the end of 2015.

Delta Domestic Fleet Restructuring. Source: Delta 8-K

United and American have planned slower transitions away from 50-seat jets. United is adding 70 E-175s to its fleet in the next two years, and the company had originally planned to use them to replace 50-seat jets on a roughly one-for-one basis. As of a month ago, United planned to remove 34 small regional jets from its fleet in 2014 while adding 27 large regional jets. This would have left 327 50-seat regional jets in the United Express fleet at year-end.

However, earlier this month, United announced plans to end hub service in Cleveland this spring, citing the regional airline pilot shortage. Republic Airways is ending all of its 50-seat jet flying for United by mid-year. (It's also removing all of its 44-seat jets from service with American Airlines by the end of 2014.) SkyWest (NASDAQ: SKYW) subsidiary ExpressJet -- which is United's top feeder carrier -- is also facing a pilot crunch, forcing it to cut flights.

These developments probably mean that United is busy revising its 2014 fleet plan to include fewer regional jets. The situation at American Airlines is similar. As of last month, its fleet plan included 305 small regional jets at year's end, but that number is likely to shrink.

Just this week, the pilots union at wholly owned regional subsidiary American Eagle Airlines voted down a new contract. The pilots expect American to rapidly downsize the carrier's flight schedule and the union plans to help pilots find other jobs -- which shouldn't be hard given the demand for well-qualified pilots across the industry.

Foolish bottom lineToday, the three big U.S. legacy carriers still have nearly 1,000 small regional jets in service through their regional airline partners. However, five years from now, small regional jets could be more or less extinct. Fuel costs and maintenance costs are both prohibitively expensive, and cheap pilot labor will soon be a thing of the past.

Many of the routes currently flown by small regional jets will be "upgauged" to large regional jets in the next few years. Some may be dropped. A significant number could even be returned to mainline service, albeit with fewer frequencies. Regardless, 50-seat jets will become a rare sight by the end of the decade.

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I flew for Delta Air Lines for 25 years. In the 90's, we pilots tried to convince the management of the utter foolishness of a 22 cents per passenger mile regional jet versus a mainline B-757 at 8 cents per mile. They (Ron Allen) would not listen and lost BILLIONS! I retired in 2004 and the company declared bankruptcy in 2006, ending payments under our pilot's retirement fund, (but not management's!). I suppose the lesson is you can't fix stupid, but you can fire them and kick them off the board of directors.

Re: pilot shortage. Read the Boeing Company's report where they express concern about their future ability to sell airplanes because "the job of airline pilot is no longer desirable". The FAA reports a fraction of pilot trainees obtaining the progression of required licenses. Flying schools are ghost towns. About 20 years ago industry conferences talked about changing flying from a "white-collar profession to blue-collar job". I have flown for a major airline, off and on the world's largest, for 20 years. I maxed out at $100,000/yr several years ago and then lost my retirement. (Due to stagnation I will never upgrade to Captain and my new 401K will be worth 10% of the old defined benefit plan.) Problem: White-collar professionals will not invest a quarter million and 5 years to obtain the licenses and blue-collar people cannot qualify for the job. Bigger problem: If compensation (and respect) were restored tomorrow, it would take 5 years to produce the first bubble of new pilots.

As a frequent traveler I will go out of my way and pay more to avoid any RJ. Wonder if the airlines have ever figured out how much revenue they are losing to SouthWest under this brilliant scheme. Maybe too many travelers don't pay attention to what they've purchased. I end up several times a year needing to go to a city with no option but traveling on an RJ. I can usually get out of most, but still end up 1 to 2 times a year with no option. Serves to reinforce my avoidance without fail. They cannot all go away soon enough for me!

The downsizing of the American middle class continues unabated for the last 40 years. Welcome to the world that Republican policies have instigated. So now there is a pilot's shortage because pilots have had their pay and retirement shrunken. Soon the airlines will be whining about a pilot shortage and say that the US needs to allow immigration to fill the ranks. The same thing has already happened to software engineers because there is a "shortage". Funny Republicans says that free market can fix any shortage for CEOs by raising their pay but doing the same for the people who actually work is wrong.

@coffeeblack: I think that the desirability of pilot jobs will actually improve fairly quickly in the next few years. With the big U.S. airlines becoming significantly more profitable, pilot compensation will continue to improve. (Profit sharing is also becoming increasingly important; Delta's 2013 profit sharing payout was more than 8% of employees' pay.) Also, with more and more pilots hitting mandatory retirement, and downsizing more or less over, I think pilots will start progressing up the ladder more quickly. The risk of furlough is now pretty minimal given the tight supply of pilots in the U.S. right now.

That said, it could take a number of years before the new realities trickle down into higher pay and then (eventually) more people training as pilots.

I really think that airlines should invest directly in pilot training. They could screen candidates, pick people that they thought were the most likely to succeed and become good pilots, underwrite their loans, and then forgive the loans after 10 years of service or something like that. It would be pricey upfront, but could lead to better long-term labor relations.

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I think newer more efficient short haul aircraft using turbo props are the answer here. Turboprop engines have a higher efficiency than pure jets for distances flown by commuter passengers. Again, the airlines have a lack of innovation and forward thinking that hurts the flying public.

Europe has partly solved their commuter airline issues by building very popular Bullet trains that can travel as fast a 200 MPH.

Adam, the training system you mention is called ab-initio and it's what's been used by the major European carriers for years (I used to teach in the Lufthansa program). It works very well, but frankly it's just not needed here since an easy fix to our pilot supply situation is simply to pay these highly trained professionals, even when they're new "in the right seat" as we say regarding co-pilots, wages and benefits that make it worth seeking the job in the first place. We have major university training programs all across the nation (I am a graduate of the program at Arizona State University) who can crank out new airline pilots in more than enough numbers if only the job were worth having for what it costs to pursue the degree. In my day it was! Now days that equation has changed - it's just not worth it if the job at the end of the road pays $30,000 at best.

Airline managements have reaped what they've sown in this case. If the equation changes then the supply of pilots will change. In the meantime all we're doing by retiring 50 seat regional jets is moving those $30,000/year co-pilots into larger and more comfortable regional jets. They're still on food stamps - they just have nicer airplanes to fly.

You can't raise the pay high enough to attract the numbers of pilots needed now, too late. And the major airlines that prospective students all think they will work at, will not raise pay for at least a decade, they don't have to. The airline industry has simply accepted that the industry will shrink dramatically, leaving the legacy carriers in control and unopposed by low-cost rivals. Airline costs will go down, prices up, win for them, another loss for the middle-class.

@propilot: Thanks for the comment. In my opinion, this is a good debating point but it sort of misses the point. Combined, SkyWest and Republic Airways (the two largest regional airlines) earned a little less than $200 million pre-tax last year. Together, I think they have 8000-9000 pilots. So the total profit is a little over $20,000 per pilot.

In other words, just raising the average pilot salary and benefits by $20,000 would push the regional airlines to breakeven. Going to a decent professional salary for first-year pilots would put the regional airlines out of business.

It's not like the legacy carriers are making much money on 50 seat jet flights either. This flying is barely profitable for all parties concerned even with pilot wages at their current miserable levels. The fundamental problem is that the business model doesn't work -- the pilot "shortage" is just a symptom of that.

"There is no pilot shortage only of those willing to work for $15,000 per year" is correct. Many of my friends from ATA have had to take jobs overseas. I myself took a non sched job that ended up keeping me away from home 3 to 4 weeks at a stretch with only 10 days off before having to do it all over again. It became too much for me and I went into the teaching profession. I have 17,000 hours of domestic and international experience in everything from singles, business jets to widebody airliners and could not get anyone to even give me an interview other than the foreign carriers, and I can not afford to work for the regionals. Raise the pay, hire us older pilots (I am 54) and you will take care of the pilot shortage until the younger guys gain the experience to take over.

The U.S. major legacy carriers pay enough now to attract all the applications they need from fully qualified pilots. The pilot unions will negotiate enough pay raises to continue that situation.

As has been pointed out, the pilot shortage is from potential pilots being smart enough to not invest in the current cost to become a pilot when the starting wages at the entry jobs is so low.

Either raise the entry level pay or lower the cost to obtain your license. (And the reasons for the current high cost to fly are their own long story.)

Also mentioned is the reality of ab initio training where your employer pays for your license. Again, the major legacy airlines won't need to do this for years but the entry level operators can't afford it.

Also mentioned above, is the idea of opening up immigration. In our post September 11 world, the reality is Homeland Security has an embedded xenophobia concerning foreign pilots.

Between market forces and government policies, we are backing ourselves into a corner as far as future pilot supply.

I'm a 737 Captain with a major legacy carrier. I give talks to local schools 2 to 5 times a year. Just a few years ago I was telling high schoolers to hurry up and get their license. I'm now telling them to get a 4 year degree and be looking for ab initio programs to start.

Military training has not been mentioned. Of course the U.S. military can not produce enough pilots to supply the airlines. But potential pilots should strongly consider the military as the airlines love to hire our veteran pilots.

The more I think about the pilot issue, the harder it seems to solve, given the structure of the US airline industry. However, the legacy carriers can't just sit by, because ultimately they need the passenger feed from regional airlines to make their business models work.

I'll be interested to see how big the pay improvements are at Republic Airways, where they just signed a new tentative pilot agreement. Perhaps regional carriers that are less exposed to 50 seat jet flying will be able to raise pay enough to make it worth their pilots' while.

It seems like the airlines are one of the industries that did much better BEFORE deregulation.

After the deregulation, the companies in this industry began all sorts of dumb moves. The fare wars were an obvious one. The pay cuts to pilots, flight attendants, & maintenance workers were another.

Quite a few companies have gone bankrupt or been bought by another.

The typical short sighted corporate mentality has been a huge problem, cutting salaries to the people with "boots on the ground" while piling on management bonuses.

To me regulation is a wonderful thing. It protects an industry like the airlines by establishing fares, wages & services for them. They are not allowed to shoot themselves in the foot because the industry is seen as too important to society as a whole. Regulation forces these companies to focus on more than profit. It frees them up to concentrate on customer service and employee satisfaction. Both of these things bring in the profits.

I don't know what will happen next, but I don't blame pilots for exiting this insanity. It takes enormous training & experience to fly these very large birds safely & efficiently. If pilots aren't paid fairly for that work, why bother?

I love Motley Fool. You guys are very good business analysts, but I think you're missing the fundamental questions about the airlines.

@esherrod: The airlines absolutely did better before deregulation. Airlines do not have a natural moat, and the U.S. government provided one by determining exactly who was allowed to fly which routes/schedules. Competition beyond certain limits was essentially outlawed on interstate routes.

This allowed the legacy carriers to build up and maintain bloated cost structures. Since there was no possibility of an increase in competition, there was no need to have competitive costs.

Deregulation changed all that. The last 35 years have been a prolonged period of painful adjustment. Competition has forced all of those legacy carriers into bankruptcy one or more times. With the AA bankruptcy, every legacy carrier has now addressed its cost issues and become reasonably competitive with the larger challengers, particularly Southwest and JetBlue.

So while I agree that deregulation has been the cause of the legacy carriers' woes, I don't think the airlines are doomed to an endless cycle of bankruptcies. They are now all on relatively even footings, and should remain profitable over time. (Southwest is working on a 40+ year streak of profitability!)